Spotlight on Karratha Seminar

Spotlight on Karratha Summary of Finbar Property Insight Forum ‐ 18 August 2012

Background

Mr Mark Wallace, Senior Economist of RPS Australia presented an overview of the Karratha area to Finbar’s Property Insight guests on 18 August. Finbar has summarised this presentation as a point of reference for attendees.

The Mining Boom

Currently there is $500 billion of resource projects on the books nationally, with $260 billion of these located in WA. In spite of the GFC and subsequent economic volatility, WA continued to experience robust growth in its mining investment pipeline, exceeding all other States including Queensland.

There is currently approximately $5 trillion of economically demonstrated mineral and energy resources in Australia with a value equivalent to 5‐6 years of Australia’s total economic activity.

Beyond this, there is an additional estimated $10‐$15 trillion in resources still to be identified or not yet economical based on current prices and technology.

Above image depicts Advanced Mineral and Resource projects as of April 2012 (Source: BREE 2012).

The investment cycle in WA’s mining sector is now in full swing with new capital expenditure by mining companies climbing rapidly over the last three quarters and now topping $11 billion in the March 2012 quarter. To put this in context, this is now almost double the peak of the last cycle in 2008. While the investment cycle for current projects is expected to peak in 2014/15, strong investment is likely to continue in the medium term.

In particular, Iron Ore in WA is generally a lower cost resource then our international major competitors (e.g. South America) while we hold a major competitive advantage in the form of our proximity to emerging economies such as China and India.

m demand fo or steel is proojected to exxceed supply and this proovides a degrree of Ultimateely long‐term certaintyy for the futu ure of WA’s iron ore secttor.

Steel pro oduction by region 2010 0‐2025

Source: BREE 2012

han just Iron Ore More th

Iron Oree sales are increasingly ba ased on spott pricing and d is therefore e impacted bby volatility in internattional marketts (as it is currently). In ccontrast, LNG G typically se ecures longeer term contrracts for 25 to 300 year supplyy. It is the No orth West’s sstrong expossure to both LNG and iro n ore that w will underpin the region’s economic growth and dynamism in the long‐te erm.

WA is ho ome to interrnationally significant depposits of LNG G, with the C Carnarvon Baasin near Karrratha the largeest. Due to iits proximityy, Karratha is expected to o become a m major focus oof development in the Nortth West as itt expands to accommodaate and service the LNG ssector and it s workforce..

Karrathaa focus

ne has a grosss regional prroduct of $7 billion and rrepresents Currentlly, the Shire of Roebourn approxim mately 25% o of Australia’ss exports. Fuurthermore, unemployment in Karrattha peaked a at 3.9% during the GFC (com mpared to 5.5 5% in WA) annd currently is below 2%.

Overall tthe Karrathaa area will ne eed betweenn 40,000‐50,0 000 workers by 2035 in oorder to sustain the resourcees sector and d its anticipated growth. This in turn will be reflected in the ddemand by corporattes for accom mmodation a and in particcular apartme ent living, which offers aa greater deggree of climate control.

Due to K Karratha’s keey role with tthe expansioon of the Norrth West’s re esources secttor, the State e Governm ment has com mmitted sign nificant fund s for the are ea including:

orkers Accom mmodation p project which h is a $30 mi llion develop pment  The Karrathaa Service Wo providing afffordable acccommodatio n to service workers providing essenntial services.

 Karratha CBD redevelopment worth $65 million..

 $10 million o of Royalties ffor Regions ffunding alloccated for a package of uppgrades to health services and d staff accom mmodation att Nickol Bay Hospital.



KELT has beeen allocated a total of $220.3 million tto assist with h funding thee building off a community and sportingg precinct, toogether with the second stage of the Karratha Senior High School project.

onsidering in nvestment in n a When co location you need to o consider tw wo factors: risk and capital appreciaation.

ng market The Karrratha housin experien nced robust growth from m 2005‐20007 and sincee then prope erty price gro owth has steeadied. At present Karratha is 2 25% cheaperr than Porrt Hedland and has been less volaatile than oth her towns in the North W West.

Median Priices, House an nd Units, Karraatha Suburbs,, 2005 to 2012 2 $900 0,000 $800 0,000

Median Prices

$700 0,000 $600 0,000 $500 0,000 $400 0,000 $300 0,000 $200 0,000 $100 0,000 $0 2005

Sales Volum mes, Houses an nd Units, Karrath ha Suburbs, 200 05 to 2011 350 300

Title

250 200 150 100 50 0 2005

2006

20 007 Home

2008

2009

2010

2011

Unit Source: RPData (2012) and RPS

2006

2008 2009 House Unit U

2010

2011

2012*

Source: RPD Data (2 2012) and RPS Notes: 2012 is Year To Date

arratha markket is also a m much The Ka easierr propositionn for resale because prices continue too be accessible to a wider market, suppporting sales volum mes.

Overall rental retuurns in Karratha are on parr with Perth commercial//retail rates. This reflectss the influencce of the corporate residenttial rental market.

However, corpora te rental retturns can be volatile in the N North West, unless the prroperty has gguaranteed ccontracts with corporate or governmentt agencies, as is beinng offered att Pelago West (5 year term ms).

Averagee Rents and G Gross Rental Return, Karrratha, June 2012

Source: PDC (2012)

2007

Conclusions

Based on the analysis by RPS Australia the following conclusions can be drawn:



The mining boom 2.0 has commenced;



Karratha is a major centre of iron ore production/ export and future LNG production;



This in turn will drive employment and population growth;



Pilbara Cities initiative and State Government investments support future population growth to 50,000 in 2035;



House prices experiencing stable, steady growth; and



Price points are more affordable than other Pilbara Centres yet characterised by strong gross rental returns.

It is this combination of strong economic activity, sustainable house price growth, accessible price points, corporate rental returns and robust sales volumes than make Karratha a highly attractive investment proposition.

Invest with Finbar

Finbar currently has a number of corporate and government leased apartments which offer a term of 5 years at a yield of 9.47% or weekly rent of $1500. There is an option to extend the leases for a further 5 years with annual CPI increases.

The benefit of this arrangement is that the Government agencies will in fact manage the properties and the tenants i.e. conduct inspections etc. at no cost to the owner (nil management fees). Therefore as an owner you are only required to pay outgoings such as strata management fees and Council rates, and any minor repairs inside of the apartment, that are not the responsibility of the tenant. All external maintenance and repairs are covered by the strata fees. Under a contract with the Government, property owners are also guaranteed security that the rent will be paid weekly i.e. no chance of default in payments. These rent returns are for unfurnished apartments.

Priced from $823,300 these 2 bed/2 bath apartments are at the forefront of the Karratha CDB redevelopment and hence are well positioned for capital growth.

Would you like more information?

If you would like to discuss the purchase of one of these limited Pelago West leased apartments then please contact John Bell on 0413 153 227.